ECONOMIC AFFAIRS: China's spending spree: our sovereignty at risk

by Patrick J. Byrne

News Weekly, March 7, 2009

China's state-owned corporation Chinalco's attempt to take a major stake in mining giant Rio Tinto signals a massive escalation of Beijing's buy-up of mineral, energy and real-estate assets around the world, particularly in Australia.

It is imperative that the Rudd Government tighten the foreign investment rules to defend Australia's economic sovereignty, argues Patrick J. Byrne.

Last October, NewsWeekly and the National Civic Council published and widely distributed a special Strategic Report, warning that the Australia's massive foreign debt and permissive foreign investment rules could leave the nation open to a "Chinese buy-out".

If Chinalco succeeded in taking a major stake in Rio Tinto (which its major British shareholders may yet stop), then China's foreign investment in Australia could rise dramatically in 2009.

China has a long-term mercantilist trade strategy, designed to give it ownership, control and pricing of vital energy and mineral resources around the world, using its state-owned companies and banks. This is vastly different from having Japanese companies invest in foreign mines and then sell the products at world prices on world markets.

As Dr Paul Monk of Austhink Consulting warned recently, Chinalco is a state-owned enterprise "run by a secretive and dictatorial party".

If it gained a major stake in Rio, "the kind of information Chinalco would be privy to ... is not available to the Australian or British governments; it will go directly to the Chinese government. This has considerable strategic implications. If we view the present case in isolation, we fail to think strategically. Xiao and his Communist Party bosses are thinking strategically. What calls for our attention, then, is strategy, not just this individual move." (The Australian, February 24, 2009).

The News Weekly/NCC Strategic Report argued for Australia to adopt a similar strategy to Germany. It said: "Germany has proposed that moves from non-European Union controlled investment groups or companies to buy a stake of 25 per cent or more in strategic parts of German industry can in future be blocked.

"This followed concerns over the Chinese attempt in 2007 to acquire 'a 10-percent stake in the US private equity house Blackstone, which has a key holding in German-based Deutsche Telekom AG, Europe's biggest phone company. [It also] followed moves by Russian state bank VTB to carve an interest in Europe's sensitive aeronautic and defence sector by seeking out a stake in the European Aeronautic Defence and Space group (EADS), which is the parent company of the European aircraft maker Airbus' (Deutsche Welle, August 20, 2008)."

Specifically, the Strategic Report argued that "Australia needs to declare a wider range of strategic industries in which foreign investment is limited or prohibited.

"In the most important strategic industries, acquisitions should be prohibited.

"In other strategic industries, foreign ownership by commercial companies should be restricted to 49 per cent, and for [sovereign wealth funds] and foreign government-owned corporations, it should be limited to 25 per cent.

"Investment in the resource sector should be as joint ventures in new projects, not hostile takeovers of existing companies."

The Strategic Report argued that Australia must not treat China as an enemy, but as a nation to be encouraged towards universal human rights and democracy. To that end, Australia should trade with China, but on Australia's terms not on China's mercantilist terms.

Financial writer David Hirst has revealed out that "representatives" of the Standing Committee of the Chinese Communist Party have been travelling to Sydney and Melbourne inspecting commercial property. They are also after "minerals, including coal" and as well as Rio, Fortescue is also being mentioned (The Age, Melbourne, February 3, 2009).

China is rapidly accelerating its overseas purchases because of the massive fall-out from the economic crisis.

Major trade imbalance

For years, News Weekly has warned that there was a major imbalance in world trade, with Japan and China accumulating huge trade surpluses with the US, and with the US running huge trade deficits. In turn, the massive trade surpluses were being loaned/invested back into the US, both financing the stock market and property bubble and allowing US consumers to buy the goods from oversees that they were no longer producing at home.

Economist Dr Lester Thurow, former dean of the Massachusetts Institute of Technology (MIT) management school, warned in his prophetic book, The Future of Capitalism (1996), that while this gave prosperity to Japan (and later China and East Asia), this two-way traffic of goods and finance could not last.

The linchpin in this relationship was US consumers. They have been buying cheap goods produced by US multinationals in Chinese sweat-shops. Now they've stopped buying. The two-way relationship is rupturing, and the US is going it alone.

David Hirst has explained the process adopted by President Barack Obama.

Between 1994 and 2004, the US money supply doubled. In just the past four months, the US Federal Reserve has doubled the money supply again!

This risks triggering a massive inflation in the US, eventually devaluing the US dollar and making it easier to repay the vast US foreign debt in low-valued US dollars. This would result in big losses to China, which has about $US 1 trillion from accumulated trade surpluses.

Hirst says: "China is onto the tactic, which explains why it is keen to convert its dollars into iron, coal and, I suspect, vast amounts of mineral wealth as well as property overseas. China must act ... while the US dollar is strong. Don't be surprised if the Chinalco deal is but the first of many, and keep your eyes on our resource stocks. There are many games being played at a geopolitical level and many a twist and turn to come." (The Age, February 5, 2009).

The world economy is in crisis. London's Daily Telegraph (February 13, 2009) published a confidential report of the European finance ministers, revealing that the exposure of the European banks to toxic assets was £16.3 trillion ($A36 trillion) or 44 per cent of the total European bank assets.

The US banks are currently being "stress-tested" and it is widely believed that some of the biggest banks will be found insolvent.

The centre of world banking has now shifted to China, with three of the world's top four banks, measured by capitalisation, being Chinese.

All the more should Prime Minister Rudd act urgently to prevent fire sales of Australia's strategic assets to Chinese Communist Party-controlled corporations.